Federated Manufacturing is considering a major capital expenditure to begin production of a major new product. Key facts and assumptions about this new product appear below. Using this information, answer the questions following. a. Estimate Federated's equity beta(asset beta) 80 m (debt) 120 m (equity) b. Estimate Federated's cost of equity capital c. Estimate Federated's weighted-average cost of capital d. Estimate the after-tax cash flows relevant to the investment. Assume the salvage value is realized in year 8 and working capital is liquidated in year 9. c. Estimate the investment's net present value f. Estimate the investment's internal rate of return. Docs the investment appear attractive financially? g. Estimate the present value of the investment's economic value added. (Note that the salvage value is captured in the annual EVAs.) h. In market value terms. Federated's debt to capital ratio is 40%. Assume the company will finance the investment in the same proportions and estimate the cash flows from and to equity. (Assume the company will use an 8-year, 7% loan to be repaid in equal annual installments.) i. Estimate the net present value of the equity cash flows. (That is, analyze the investment from the equity perspective.) j. Estimate the internal rate of return to equity. k. Why is the NPV from the entity perspective higher than the NPV from the equity perspective, while the IRRs arc in just the reverse order"? l. Docs the equity perspective tell you any more or less about the merits of the investment than the entity perspective? Which analysis is easier to perform? Federated Manufacturing is considering a major capital expenditure to begin production of a major new product. Key facts and assumptions about this new product appear below. Using this information, answer the questions following. a. Estimate Federated's equity beta(asset beta) 80 m (debt) 120 m (equity) b. Estimate Federated's cost of equity capital c. Estimate Federated's weighted-average cost of capital d. Estimate the after-tax cash flows relevant to the investment. Assume the salvage value is realized in year 8 and working capital is liquidated in year 9. c. Estimate the investment's net present value f. Estimate the investment's internal rate of return. Docs the investment appear attractive financially? g. Estimate the present value of the investment's economic value added. (Note that the salvage value is captured in the annual EVAs.) h. In market value terms. Federated's debt to capital ratio is 40%. Assume the company will finance the investment in the same proportions and estimate the cash flows from and to equity. (Assume the company will use an 8-year, 7% loan to be repaid in equal annual installments.) i. Estimate the net present value of the equity cash flows. (That is, analyze the investment from the equity perspective.) j. Estimate the internal rate of return to equity. k. Why is the NPV from the entity perspective higher than the NPV from the equity perspective, while the IRRs arc in just the reverse order"? l. Docs the equity perspective tell you any more or less about the merits of the investment than the entity perspective? Which analysis is easier to perform
